Explore the intricacies of sharing tax benefits in M&A through a detailed case study of a $1.1 billion stock acquisition. Learn how the choice between stock and asset acquisition impacts after-tax returns and the resolution of disputes in Darling Ingredients Inc. v. Smith.
M&A Stories
December 15, 2023
In the dynamic realm of M&A, sellers seek optimal after-tax returns. A common dilemma arises in choosing between selling company stock or assets, with buyers favoring the latter for tax advantages. Our focus today is a $1.1 billion stock acquisition of a Virginia-based company operating 18 rendering plants and cooking oil facilities across the U.S.
The Deal: Asset Acquisition for Tax Gains
To capitalize on tax benefits, the acquisition was structured as an asset purchase. The buyer, acknowledging these advantages, committed to a $92.6 million payment to the seller at closing, representing the estimated share of tax benefits. This figure was subject to adjustment based on final calculations—lower figures meant a partial refund, while higher amounts entailed additional payments.
A Clash of Numbers
Post-closing, the buyer’s recalculations revealed a $29 million reduction in the seller’s share of tax benefits. Promptly, the seller lodged a written protest within the 30-day window, contesting the computation.
Resolution Stalemate
Per the stock purchase agreement, the dispute was referred to an accounting firm for resolution. However, tensions arose as the seller sought to introduce additional concerns, a move rebuffed by the accounting firm. The agreement limited the review to issues raised in the seller’s initial protest.
Legal Intervention
The impasse found resolution in the Delaware Court of Chancery, which aligned with the accounting firm and the buyer. The case, Darling Ingredients Inc. v. Smith, now heads back to the accounting firm for review based solely on the seller’s initial protest.
This case underscores the intricacies and potential pitfalls in sharing tax benefits during an M&A transaction, emphasizing the importance of meticulous agreements and adherence to procedural confines.
Case Reference: Darling Ingredients Inc. v. Smith., C.A. No. 2023-0614-LWW Court of Chancery of Delaware (Submitted: September 6, 2023. Decided: December 11, 2023).
By John McCauley: I write about recent legal problems of buyers and sellers of small businesses.
Email: jmccauley@mk-law.com
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Check out my books: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles and Selling Assets of a Small Business: Problems Taken From Recent Legal Battles
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